Reducing greenhouse gas emissions in developed countries

It is an honour to join this distinguished gathering, at a moment when we are facing such critical challenges.

We need action to reduce greenhouse gas emissions and we need it now. For those who want to use the economic crisis to justify delaying action, our message is that it doesn't make economic sense, especially given the costs and risks of inaction. Without significant new policy action, the OECD projects that world GHG emissions would increase by about 70% by 2050 and continue to grow thereafter. This could lead to a rise in world temperatures of 4°C above preindustrial levels, and possibly 6°C, by 2100.

We can just imagine the social and human consequences. The economic cost would also be immense. And we have all seen recent reports suggesting that climate change might be occurring faster than earlier thought.

By acting now, we may have 10 to 15 years “breathing space” to build a full-fledged global carbon market. If we do that, it would cost just about one-tenth of a percentage point of world annual GDP growth between 2012 and 2050 to achieve moderately ambitious climate targets. Put differently, this would mean a 4% reduction in GDP in 2050 compared to a scenario where no policy action is taken. Bear in mind that over the same period world GDP is projected to grow by more than 250%.

If action is delayed, and GHG emissions continue to accumulate, the cost of reducing concentrations to an acceptable level later might well be much higher.

Now is crunch time. I am aware of the difficult choices that lie ahead. But I believe the elements of a deal are there. And we see our role as providing the tools to inform policy choices and to help you achieve an ambitious agreement in Copenhagen.

The good news is that there are signs that policies are changing. Most developed countries have declared or suggested possible mid-term emission reduction targets. Japan’s new government has just increased the ambition of their target. Important draft legislation is being prepared in many countries to back-up these targets. Some non-Annex I countries are also coming forward – including Korea, Mexico and South Africa. Other major emitters, such as China, are putting in place increasingly ambitious policies to reduce their emissions. These are welcome developments.

However, most of these responses are still not ambitious enough. The combined effects of the developed country targets would lead, according to our analysis, to only 8 to 14% reduction in their emissions by 2020 compared with 1990. Clearly, this falls short of the 25 to 40% reduction that, according to the IPCC, developed countries must achieve to put emissions on a pathway that would prevent temperatures from rising by more than 2°C. So, more ambitious action is needed.

Developed countries have a responsibility not only to take the lead on emissions, but also to significantly scale-up financing to support mitigation action in developing countries, as well as adaptation efforts. This has been a major stumbling block in the negotiations, but there are signs they are also moving on that front. The recent EC Communication is a positive step forward.

Clearly, carbon markets will have a strong role to play, but public financing is also critical. OECD has been tracking bilateral support to mitigation for over a decade, and we are examining ways to better harness the carbon market and private investments, to create innovative financing flows. We are also looking at how best to govern this new scaled-up financing to ensure it is in line with developing country development plans and objectives.

We all recognize the legitimacy of their development aspirations and we all need to strive to make action on climate change compatible with or better still, supportive of, development goals. This is possible, but everyone has to do its part. Incidentally, in terms of actions that can be taken, our recent analysis finds that removing fossil fuel subsidies could reduce global GHG emissions by 10% in 2050, while boosting economic growth.

Are mitigation efforts comparable?

Both developed and developing countries have indicated that they will do their “fair share” of GHG mitigation in order to reach a successful agreement in Copenhagen. The difficult part is working out what exactly is a “fair share”.

As background to that meeting, we have compared the costs of declared country targets using a range of metrics, reflecting some of the common guiding principles of capability, responsibility and potential.

Comparing efforts amongst countries is not straightforward – both the metrics used and also the assumptions can significantly impact on how countries compare.

In terms of one such metric – namely GDP costs – we found that the current declared targets of developed countries are roughly similar in terms of costs across countries, with perhaps slightly higher GDP losses expected in New Zealand and Australia and in countries using carbon more intensively, such as Russia and some Eastern European countries. These results are based on the technical assumption that there is linking of emissions trading schemes amongst countries. This lowers the overall costs of action, especially in Europe and Japan.

Based on other principles for sharing emission reductions the picture shifts. For example, combining analysis of mitigation potential, ability to pay (GDP/capita), and a measure of responsibility (GHG/capita), results suggest a need for greater action by Australia, Canada, Russia, Ukraine and the US.

Addressing carbon leakage and competitiveness concerns

Concerns about “comparable effort” amongst developed countries are driven by the need to ensure that commitments taken on in Copenhagen will not put their economy at a competitive disadvantage. I truly understand this concern! But let’s keep this in perspective.

Fears that ambitious climate policy action will lead to a loss in competitiveness for key sectors, or to carbon leakage, are often exaggerated. I am not downplaying the structural adjustments that will be needed to move to a low-carbon economy. Energy-intensive industries will be particularly impacted. But unless it is only a very few countries that take action against climate change, carbon leakage rates and competitiveness effects of climate policies will be small.

Let me present an illustrative example. If the EU were to cut emissions by 50% by 2050, with no other countries taking any action, our analysis suggests that almost 12% of their emissions reductions would be “leaked”, or offset, through increased emissions in other countries. Instead, if the number of countries participating was expanded to notably include all industrialized countries, not just EU countries, the GHG leakage rate would reduce to just 2%.

Before concluding, let me turn to some of the options being considered to counter potential competiveness or carbon leakage effects. Let me sound a word of caution here. Recent OECD analysis has found that Border Tax Adjustments (BTAs), for example, are costly to both the countries that implement them and their trading partners. While they can reduce carbon leakage, they have little effect on losses in value-added to affected industries. They are also administratively burdensome to implement and may lead to trade retaliation.

Minister Hedegaard, Ministers,

The window of opportunity is limited.

Broader and deeper participation by countries and sectors in GHG mitigation will be critical to reach a successful agreement in Copenhagen.

Rigorous analysis for comparing different levels of effort is available - by OECD and by others. It is meant to help countries put their own proposed efforts into perspective.

At the same time, we need to recognize that there is no single, objective answer to the question “what is a fair share”. What is important is to scale-up our collective effort, and find ways to make a low carbon society compatible with economic growth. This can be done, if the right policies are in place. This is the main message I would like to leave you with today.